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I think there's a trade idea in there somewhere...

By DJ Matt King from Citigroup

O little tail of downside risk

O little tail of downside risk
How still we see thee lie!
Awash with deep and dreamless greeks
The spreadsheets cannot lie.
Yet in thy dark cells shineth
The markets’ scope for fright
The hopes and fears of traders’ years
Are met in thee tonight.

For selling vol this rangebound year
Has seldom gone astray.
With bears asleep, the hedgers keep
Being killed by time decay.
And central banks encourage
The reckless search for yield
They’ve said they’ll do whate’er it takes –
No wonder risk appeals.

How casually, how frighteningly
The risks are now dismissed.
Spain’s fall to junk, Greek exit
The looming fiscal cliff.
For recent years do demonstrate
The power of QE.
What matters sovereign solvency
When you have OMT?

But history says when vol is low
There lies complacency.
The worldly wise should use this time
To buy convexity.
For if crisis strikes, then all assume
The powers will intervene
But where there is consensus
There tail risk lurks unseen!

Jingle bells (fiscal cliff remix)

Dancing on the edge
Of the looming fiscal cliff
Impossible to hedge
The politicians’ tiff.
It’s spending cuts we need
To cut the deficit
But taxes too must rise
That much is definite!

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

Obama wants a rise
In tax rates for the rich
Yet Boehner’s compromise
Still can’t help decide which!
Republicans are bound
By Norquist’s famous pledge
There’s little common ground
Will we fall off the edge?

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

On the spending side
The problem’s Medicare
We simply can’t provide
Now baby boomers have grey hair!
Republicans want cuts
A trillion, maybe more
But Democrats will not discuss
Their favourite candy store!

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

The outlines of a deal
Are plain for all to see
No! False alarm! It’s been revealed
They’re going for Plan B!
This posturing is mad
And if that’s vetoed too
They’ll have to start a clean scratch pad
Unless there’s some breakthrough!

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

Too late, we’ve fallen off
Let’s hope we bungee jump
Otherwise this trough
Will turn into a slump!
Hooray! The cliff’s been fixed
With short-term compromise
Too bad it’s in the abyss beyond
The real problem lies!

Fiscal cliff, fiscal cliff
Politics in play!
The only thing they have in mind
Is the next election day! Hey!
Fiscal cliff, fiscal cliff
Isn’t politics great?
They've left us now in such a mess
We’ve no choice but to inflate.

The Miasma School of Economics

From Angry Bear Blog:

Economics today has a profound resemblance to medicine before the germ theory of disease.

Lots of people in 1854 were trying to figure out what caused cholera, and how it was transmitted. The dominant theory was “miasma” — basically bad air emanating from smelly, unsanitary conditions, especially in poor areas with lots of leaking, overflowing basement cesspools full of shit. These were contaminating the water supply, of course, so the real transmission mechanism was people drinking the effluent from previous victims.

The solution to the miasma problem? Empty the cesspools into the Thames River— systematically poisoning the water supply. Yes, that’s what they did.

Voltron says: Steve Keen refers to it as "Ptolemaic economics"   It reminds me of how the bubonic plague was blamed on cats.  After all the cats were killed, the actual cause, flea bearing rats, ran wild.

Full article: http://www.angrybearblog.com/2012/11/the-miasma-school-of-economics.html

Colbert: High Frequency Trading

Voltron says: Proponents of high frequency trading say that it adds liquidity. True, you can buy stock 1/10 of 1 cent cheaper because of it. But that is not going to be much help when the stock later has a flash crash of 50% and your stop-loss order gets triggered.

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
High-Frequency Trading
www.colbertnation.com
Colbert Report Full Episodes Political Humor & Satire Blog Video Archive

Depicting the denial of reality

This was too funny not to post . . .

The dark line is the GDP of Greece.  The dashed lines were the official projections from the group that is bailing Greece out.  Not only were they wrong five years in a row, but the more the situation worsened the more rapid the predicted recovery.  The latest forecast was for an *immediate* improvement.

If you've been reading my blog long enough, you probably already know not to listen to official government projections.  If you are waiting for a bureaucrat, central bank or stockbroker to tell you when to sell, it will be far too late.

Debts vs Wealth

"Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era." 

-Frederick Soddy, 1926

Where's the gold?

There have been a flurry of reports in the mainstream media (e.g., here) about Germany wanting to audit it's gold reserves, most of which is kept in the US.  The concern is that the gold has been leased or swapped and is not actually at the Federal Reserve Bank of New York.  Gold is commonly leased to finance gold mines.  Since the miners owe gold, not dollars, they are hedged in case the price of gold goes down.  I have a theory that the gold was leased to China (a major holder of US debt) and possibly Russia under the pretense of financing mines, but in reality to reassure them with regard to our national debt.  I don't think we'll ever see it again.

Reverse Mortgage

There was a New York Times piece yesterday about the elderly getting scammed by reverse mortgages.

http://www.nytimes.com/2012/10/15/business/reverse-mortgages-costing-some-seniors-their-homes.html?_r=1&pagewanted=all

There are definitely many things to beware of, but a reverse mortgage is a great way to "short" sell your house because it's a non-recourse loan in all states (i.e., they cannot come after you for more than the house, no matter how much the house goes down in value).  Back in '05 I would have bought a house and immediately done a reverse mortgage but you have to be 62 years old.   I wouldn't do it now though, because house prices my be bottoming out.

Wells Fargo gets sued . . . finally

Voltron says: Someone got the government to sue Wells Fargo under the False Claims Act.   The False Claims Act is a civil-war era law that allows whistleblowers to provide evidence that the government (in this case, the Federal Housing Administration) was defrauded.  The government can usually sue for triple damages, and the whistleblowers are entitled to keep around 20% of the money recovered.  If the Federal prosecutors refuse to sue, the whistleblowers can file the suit themselves.

I guess they had to wait for the criminal statute of limitations to expire before they got around to doing anything.

Since this is only about FHA loans (remember Fannie Mae and Freddie Mac were not officially government agencies), the amounts involved are not enough to sink Wells.

Background: http://www.bloomberg.com/news/2012-10-09/u-s-files-civil-mortgage-fraud-suit-against-wells-fargo.html

Dealbreaker makes the point that although there are no embarrassing "smoking gun" emails of mal intent, this case is actually more straight forward because there were clear violations of explicit rules.

http://dealbreaker.com/2012/10/wells-fargo-managed-to-sell-bad-loans-to-government-agencies-without-sending-embarrassing-obscenity-filled-emails-about-it/

Egan Jones sued by SEC

Nothing has changed.  The Security and Exchange Commission has declined to indict Moody's and Standard & Poor's, the ratings agencies employed by the banks to sanctify their garbage mortgage securities; however, they decided to sue the much smaller independent ratings agency, Egan Jones, which did not have a role in the crisis, but had the nerve to downgrade US debt.

http://www.bloomberg.com/news/2012-09-30/sec-sues-the-one-rating-firm-not-on-wall-street-s-take.html

Why haven't house prices crashed in Australia?

Voltron, spanning the globe to bring you the gouge:

Why haven't house prices crashed in Australia?  I bring this up, because I need something new to short sell!   It looks like house prices may have bottomed in the US because the Fed will continue to print money to buy bad mortgage debt and the banks stubbornly refuse to write off bad loans.   House prices in Canada are still very high, especially Toronto and Vancouver, but I can't figure out how to short this market because all the loans are guaranteed by the Canadian government (CMHC).  It's waaaay undercapitalized, but the Canadians have a printing press too.

Loans in Australia, on the other hand, are generally not guaranteed by the government and their housing prices have remained stubbornly high in the face of a global real estate collapse and debt deflation.

Why?  According to Karl Fitzgerald on Australian Community Radio (The Renegade Economist on 3CR) says that in Australia, the bank counts the "expected price increase" as "income" when deciding if you can afford the loan.  Since prices have been going up 6-8%/year, the houses are basically self-financing and it doesn't matter what your income is.

This HAS to be the reason.  That is a level of insanity not even approached in the US.

Demographics is destiny

Voltron says: I recently heard someone say "demographics is destiny" and this gave me an epiphany. Let's think about how people will fund their retirements and consider an extreme case: There are 100 retirees and 2 workers on an island. Does it matter how much money the retirees have? How many bonds they have? How great their pensions are? Whether or not their pensions are fully funded? No, it does not. Two people cannot support 100 retirees so matter what the bookkeeping entries, bank statements and balance sheets say.

What does it mean for society as a whole to "save money"? It doesn't mean anything because all money is debt. It is both an asset and a liability. You can try and indebt the future generations by promising to tax them, but future generations may or may not honor that debt. Of course, in any case, debts that cannot be paid, will not be paid.

It is in bad taste to turn a moral obligation (taking care of the elderly) into a financial obligation. We would recoil at the idea of family members sending bills to one another. The older generation looking down and saying you have to take care of us, because we said so, or because you owe us a financial debt, may not carry as much weight as the simple moral obligation.

Now what the older generation, CAN save, is productive capital: infrastructure and machines. That can increase productivity of the working generation to help them support the retired generation, but only up to a point.

The older generation ultimately passes down to the next generation all of their capital, including all government lands and unused resources.

If money represented capital, instead of debt; if it represented the accumulated capital of society, then it WOULD represent the capital that could be saved and then purchased or inherited by the next generation and used to support retirees.

Steve Keen

I've added a new person to the "Smartypants Hall of Fame" on the right Steve Keen is an Economist in Sydney, Australia. He is "post-Keynesian" and has publicly clashed with Paul Krugman from the New York Times. He wrote a book, Debunking Economics, that is a scathing critique of current economic theory. I will be working with him on his open-source dynamic economy modeling software, Minsky.

Capital Account with Lauren Lyster

Capital Account with Lauren Lyster is a new show on RT (aka "Russia Today"). I can't say enough good things about it. The guests are fantastic. If you do one thing to keep on top of the economy, WATCH THIS SHOW . . . and read my blog . . . OK two things ;-). You can subscribe to it on YouTube. http://www.youtube.com/user/CapitalAccount

I'm baaaaaack

I just retired from Wall Street and will resume blogging. I'm pretty much just invested in gold until the whole system resets. I realized that with all my risky gyrations with shorting stocks and trading options I would have done just as well just buying gold. Spread the word that Voltron is back!